Supporting the Transition to Climate-Neutral Production: An Evaluation Under the Agreement on Subsidies and Countervailing Measures

Abstract

To reach climate neutrality, carbon emissions from the production of basic materials need to be curtailed. When governments encourage this transition by adopting support measures, the measures must comply with the Agreement on Subsidies and Countervailing Measures. This article analyzes three selected support schemes under the Agreement on Subsidies and Countervailing Measures: (i) free allocation under emissions trading systems to operators of installations at risk of carbon leakage; (ii) the combination of a charge on carbon-intensive materials with free allocation; and (iii) carbon contracts for difference, under which governments cover the incremental costs of climate-neutral production processes relative to conventional processes. The analysis reveals that the current regime of free allocation is vulnerable to challenges under the Agreement on Subsidies and Countervailing Measures. By contrast, the combination of free allocation and a charge on carbon-intensive materials would ensure consistent carbon pricing and thus would not amount to a subsidy under the Agreement on Subsidies and Countervailing Measures. In a similar vein, the carbon contracts for difference could be designed so that they would not confer a benefit and hence not constitute a subsidy.